Set minimum wage violates free trade

July 3, 2003

By Tibor machan

Santa Fe is a well known and fashionable New Mexico desert city and largely in the hands of a bunch of meddlesome lefties.
Perhaps not surprisingly, then, Santa Fe recently enacted an ordinance that mandates — that is to say, coercively imposes — a minimum wage of $10 plus that every employer must pay. There is no opportunity to come to terms with potential employees — the politicians have taken things over.
Of course, there is already a national minimum wage, so these statists are not breaking any new ground. They perpetrate restraint of trade now with the full backing of the federal government’s well-established tradition of doing so. And this country is widely labeled “capitalist” by some folks — what a joke.
Now what exactly is so bad about imposing on people the terms of their employment relationship? Why should employers not be coerced to pay a certain sum, and why should employees be left to their own resources to find the best deal they can?
The first and most important reason is that free men and women ought to trade on terms to which they can agree of their own free will. This is one of the things that having the right to liberty means — other people don’t have any authority to tell you what you must pay or be paid. That is what free trade is all about.
Moreover, America is also supposed to be the champion of the revolutionary idea that governments may not interfere with people’s commercial affairs, namely the policy of laissez-faire! It is morally and should be legally wrong for anyone to intrude on people doing trade with each other. And that holds even when some are very well off and others aren’t. Coercion isn’t supposed to be the way to remedy economic inequality, hard work and prudent deals are.
The other reason it is such a terrible idea to set minimum wages or prices is that it fosters unemployment. If you set wages higher than the marketplace would establish through free trade, those who could have gotten a job at a lower wage will not get a job at the higher one. Instead, the work they would have been hired to perform will be distributed among those already employed, leaving the newcomers out to dry without a job. Which is only logical and very bad news for those affected.
Indeed, as it was learned so painfully via that glorious Soviet experiment in economic planning, the only way to do a thorough job of coercing the terms of trade is to abolish trade altogether and substitute for it full economic regimentation. That, of course, will lead to nothing less than the bankruptcy of the region in which it is established because planners are notoriously inept at figuring out what prices and wages ought to be. Exactly that goal is served best by free trade.
This is what was shown by Ludwig von Mises in his path-breaking book “Socialism,” published in 1921, in which he demonstrated the impossibility of rationally calculating prices and wages from above, by planners and regulators. For decades after von Mises made his case, socialist tried to show they can pull off the magic of figuring out what things should cost without actually having to ask the people who produce and consume goods and services. But they failed and eventually even such sympathizers with socialism as John Kenneth Galbraith and Robert Heilbroner admitted that von Mises was right.
OK, then, so what’s with the Santa Fe politicians? Well, they are following a principle that another famous free-market advocate, Frederick Bastiat, identified, namely that what is seen tends to be believed more than what is not seen but is equally much so. Forcing employers to pay unskilled workers $10 is seen and often believed to be just such a charitable, nice thing to do. But depriving thereby a bunch of others of jobs is not something that’s visible and takes some figuring to learn about.
And politicians love it just that way!